- CFA Exams
- CFA Level I Exam
- Study Session 8. Financial Reporting and Analysis (3)
- Reading 28. Non-current (Long-term) Liabilities
- Subject 1. Accounting for Bond Issuance, Bond Amortization, Interest Expense, and Interest Payments
CFA Practice Question
A company issued a $50,000 7-year bond for $47,565. The bond pays 9 percent per annum and the yield-to-maturity at issue was 10 percent. The company uses the effective interest rate method to amortize any discounts or premiums on bonds. After the first year, the yield to maturity on bonds equivalent in risk and maturity to these bonds is 9 percent. The amount of the bond discount amortization recorded in the second year is closest to ($) ______.
A. 223
B. 282
C. 343
Explanation: Interest paid = Market rate at issue x Issued amount of bonds = 9% x $50,000
Interest expense = Market rate at issue x Carrying (BV) of bonds
Amortization of discount = Interest expense - Interest paid
Year | 1 | 2
Interest paid | 4,500 | 4,500
Interest expense | 4,757 | 4,782
Amortization of discount | 257 | 282
Carrying value | 47,822 | 48,104
Interest expense = Market rate at issue x Carrying (BV) of bonds
Amortization of discount = Interest expense - Interest paid
Year 0 carrying value: 47,565
Year | 1 | 2
Interest paid | 4,500 | 4,500
Interest expense | 4,757 | 4,782
Amortization of discount | 257 | 282
Carrying value | 47,822 | 48,104
Amortization in the 2nd year is 282.
User Contributed Comments 4
| User | Comment |
|---|---|
| birdperson | you can use the amort function on the BA2 plus. N=7 I/Y =10 PV = 47,565 PMT = -4500 (9% of 50,000) FV = 50,000 then 2nd PV (AMORT)... p1=2 p2=2 ~~ this gets you the amortization for year 2. the PRN is the amortization of principal (282.15) |
| rjdelong | what are the p1 and p2 = 2 actually telling the calculator? |
| sarasyed5 | @birdperson I'm getting 212.8 as answer in my calculator |
| racoon971 | Yes same question what are p1 and p2 ? |